IRS To Allow Truncated SSNs

November 14th, 2017 No comments

In an effort to reduce identity theft, the IRS issued proposed regulations that would permit employers to use truncated taxpayer identification numbers (TTINs) on Forms W-2, Wage and Tax Statement, issued to employees. Permissible TTINs are Social Security numbers (SSNs) with the first five digits of the nine-digit number replaced with asterisks or XXXs in the following formats: ***-**-1234 or XXX-XX-1234.

Although this change was effective on the date of enactment, December 18, 2015, the IRS is delaying the effective date of the proposed regulations until Read more…

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Increasing State Income Taxes – Panacea or Pain

November 7th, 2017 No comments

Discussions about eliminating the state and local income tax deduction as part of President Trump’s agenda for a new tax act have taxpayers in New York, New Jersey, Connecticut, and California up in arms because they would lose a very significant itemized tax deduction if this provision was enacted by Congress resulting in an increased tax burden.

Some would argue that perhaps it is time Read more…

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What? The IRS does not follow its own publications?

October 31st, 2017 No comments

Our tax law is overly complicated. Many of its laws have exceptions, and sometimes those exceptions have exceptions. If you are a DIYer and rely upon the IRS’s published materials to prepare your tax return, you may just find yourself at the wrong end of an IRS audit examination.

The first rule that you need to understand is that you cannot rely upon IRS oral advice. So if you are calling the IRS to seek guidance, the IRS says that you cannot rely upon that oral advice. For years the IRS had a reputation of putting its most inexperienced employees (new hires) on its taxpayer assistance call lines. Thus it was possible that the person calling knew more about federal income taxes than the IRS person on the other end of the call. Today, due to IRS staff cutbacks and long wait times, it is difficult to make contact with an IRS employee by phone. Furthermore, the IRS has closed many of its walk-in offices to the public so many taxpayers can no longer walk into an IRS office and seek oral advice.

We are now in the information age and many taxpayers will look for tax advice on the Internet. The IRS website has its own search engine to allow taxpayers to “research” a tax issue. This website contains a wealth of information. Surely taxpayers can rely on that official IRS information, correct? Read more…

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IRS Terminates Equifax Contract

October 24th, 2017 No comments

The Internal Revenue Service has its issues. Nobody will deny that.

After Equifax announced one of the largest security breaches ever, the IRS announced in September that it signed a $7.25 million contract with Equifax. That contract was supposedly a no-bid contract and Equifax was to provide the IRS with taxpayer and personal identify verification services. The contract stated that Equifax was the only company capable of providing these services to the IRS and it was deemed a “critical” service that could not lapse.

The IRS recently announced Read more…

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Traditional IRA Converted to Roth IRA – Watch Your Step

October 17th, 2017 No comments

A taxpayer recently informed us that he did a Roth conversion. After completing the conversion, he asked if the IRS could “undo” the conversion under the “step transaction” doctrine. As a side note, it is ALWAYS best to consult with your tax advisor before rather than after making a financial transaction.

The Roth Conversion: In its simplest form, a Roth conversion is when a taxpayer converts a traditional IRA to a Roth IRA. This is allowed by the Internal Revenue Code. When the conversion is made, the taxpayer incurs an income tax liability related to the untaxed earnings that have accumulated in the traditional IRA. Why would someone want to pre-pay their income taxes? Based on several factors which will not be discussed herein, it may be a sound financial decision to pay taxes today to avoid the future taxes that will be due when RMDs (required minimum distributions) are required to be made at age 70 ½ and there are also wealth transfer considerations. Remember that Roth IRAs do not have RMDs and the monies in a Roth account can be withdrawn tax-free once certain conditions are satisfied.

The taxpayer who asked the question was doing what is referred to as a “backdoor” Roth conversion. In this situation, the taxpayer is not eligible to make a Roth IRA contribution. The taxpayer then makes a non-deductible traditional IRA contribution and then (almost immediately) converts that IRA to a Roth IRA. Since the non-deductible traditional IRA likely has little or no earnings, there is little or no income tax due on the Roth conversion.

The Step Transaction Doctrine: This is a judicial doctrine that combines a series of formally separate steps, resulting in tax treatment as a single integrated event. This doctrine is often used in combination with other doctrines, such as substance over form. Thus, the taxpayer who is ineligible to make a Roth contribution as a single transaction is precluded from making the contribution by entering into a multiple of other steps to obtain the desired result. In other words, the multiple steps are collapsed into a single step.

Old and Cold: This is an unstated rule that is generally known to experienced tax practitioners. At some point, events are so old and cold that they acquire reality by themselves and cease to be part of an overall plan or transaction. How long this takes is unclear. Some practitioners would likely argue that a transaction has to be at least two tax years old. We have seen some taxpayers delay a transaction for one full year and a day in another tax year. For example, if a traditional IRA contribution is made in 2017 and the conversion occurs on January 2 in 2019, have two tax years passed? The taxpayer would argue that the step transaction and substance over form doctrines would not apply because the first step of the event occurred in the second preceding tax year.

However, the above old and cold argument is less likely to prevail if the taxpayer consistently each year converted his/her traditional IRA to a Roth IRA.

If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.

Copyright © 2017 Keystone Financial Solutions, P.C.  All rights reserved.  BE SURE TO READ THE DISCLAIMER PAGE: Content in this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher of this blog makes no representations as to the accuracy or completeness of any information herein, will not be liable for any errors or omissions, and shall not assume liability for any losses, injuries, or damages from the display or use of this information.
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Revocable Trust vs. Irrevocable Trust

October 10th, 2017 No comments

Financial planning includes periodically meeting with an experienced estate tax attorney to ensure that one’s estate plan is current and meets the objectives of the individual. When meeting with legal counsel, one would be well served by understanding the differences between a revocable trust and an irrevocable trust. All comments here are personal and should not be considered the rendering of legal advice. We are not attorneys. Only attorneys can render legal advice which is why we recommend that you seek competent legal advice on these matters.

In its most simplistic terms, a revocable trust (RT) is where the grantor of the trust (you) continue to own the assets in the trust. The trust is reported under your social security number and all income of the trust is reported by you. RTs are often referred to as “grantor trusts” or “living trusts” and are essentially just an extension of your will.

A RT differs from an irrevocable trust (IT) where the ownership of the assets is transferred Read more…

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Are You Are Being “Liked” by the IRS

October 3rd, 2017 No comments

Eric Sorensen of WSU News has reported that “The next time you want to tweet something about how much you hate paying taxes, or what you did with your huge tax refund, you might want to rethink it.” Mr. Sorensen referenced the work of Kimberly Houser, a clinical assistant professor of business law at Washington State University’s Carson College of Business, that the IRS is breaking several laws by mining large data sets and combing through social media posts (like Facebook, Instagram and Twitter) in its search for taxpayers to audit.

Mr. Sorensen reported that “According to information obtained by the American Civil Liberties Union, the IRS also has violated Read more…

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The Cost of Borrowing from Your 401(k) Plan

September 26th, 2017 No comments

If your employer has a 401(k) plan, the plan likely has a provision that allows you to borrow from the plan. Although the plan will charge you interest on the amount borrowed, the repayment of the interest and amount borrowed go back into your 401(k) plan. So regardless of the rate of interest charged, whether it is 3% or 5%, isn’t your net cost of borrowing zero because you are paying yourself? Doesn’t it sound like an interest-free loan?

If it were truly an interest-free loan, would it not make sense to borrow as much as possible from your 401(k) plan? After all, if the plan charges a 5% interest rate, where in today’s market can you earn 5% guaranteed? Should you borrow the max from your 401(k) plan to maximize your financial wealth?

The misconception about these plans is that Read more…

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Will Tax Returns Require a Selfie?

September 19th, 2017 No comments

Tax jurisdictions are prime targets for hackers and scammers. Identify theft of a person’s social security number, date of birth, W-2 information, and other data allow thieves to file false tax returns and claim false refund claims.

What are states doing to combat ID theft? The first line of defense is that states are delaying the issuance of refunds to allow them more time to verify that the tax returns filed are actually those of the taxpayer and not those of a thief. Taxpayers’ situations are not static and can change significantly during the tax year (e.g., new job paying a higher salary, additional dependent, marital status change, etc.) Accordingly, working with your tax professional during the tax year to ensure that significant overpayments are not made is more important today than ever.

Four states (AL, IL, OH, NY) require that taxpayers who e-file their returns provide their driver license information. Some states allow taxpayers to provide this information on a voluntary basis. It has been rumored Read more…

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Filing an Extension of Time to File Form 1040 – The Good, the Bad and the Ugly

September 12th, 2017 No comments

There are many taxpayers who experience great angst to learn that their return cannot be filed by the due date of April 15 and need to file for an extension of time to file until October 15. There are other taxpayers, for whatever reason, the filing of an extension is a regular, annual occurrence.

First, we need to discuss a few truisms: Read more…

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